You may have heard of ‘asset allocation.’ Asset allocation refers to what kind of investments you make. Though the term looks similar, ‘asset location’ means something different. Asset location refers to what type of investment accounts that you use to invest your money. In this article, we will be focusing on retirement accounts (such as IRAs) and taxable brokerage accounts.

Retirement Accounts (IRAs)

These type of accounts are tax advantaged, but you can be penalized if you make withdrawals too early (or in some cases, if you withdraw an amount that is larger than what you put in). These are great for investments if you want are aiming to have more income that you can withdraw without penalty when you reach retirement age. Because of the tax advantages of these accounts, investing in these accounts is more simple.

Taxable Brokerage Accounts

On these accounts, you have to pay taxes on any money you make. You also will report your income to the IRS during tax season. Depending on your investments, you may have to file a 1099 form (this is pretty easy). Depending on what type of investments you have, you may have to file forms such as a Schedule K-1 form. Most investors will only have to file a 1099. Fortunately, most banks will fill the 1099 form out for you (I’m not sure about the Schedule K-1 Form). You only have to relay the information to the IRS. Of course, if you don’t make any money, you do not get taxed on your investments.

Investing in these accounts is more tricky than a retirement account. This is because you have to take another factor into consideration when you invest–you have to consider tax efficiency. For instance, ‘qualified’ dividends are normally taxed at 15-20%. ‘Unqualified’ dividends are taxed at your normal tax rate. Certain investments have lower taxes than others. Turnover rate can also effect how much your investment is taxed.

Which Asset Location is Right for You?

If you plan on retiring at 59 and a half or later and don’t want to withdraw prior to retirement, I recommend a retirement account. If you want to retire earlier than that or if you want to have extra income that you can draw from at will and without penalty, I recommend a taxable brokerage. I do a combination of both. I have a 401k with my employer, a Roth IRA, and a taxable brokerage account.

There are many reasons to get out of debt. In this article, I will give five reasons why you should get out of debt.

Debt is a Wealth Killer

On average, investment portfolios return 6-12% depending on asset allocation. Many people have loans or credit cards that have interest rates north of 7% (some credit cards have interest rates of around 30%). Would you invest in any asset that loses 7-30% a year? If not, why should you borrow money for an extra 7 to 30 cents per dollar? This may not sound like much, but if we are talking about a $30,000 loan at a 10% annual interest rate, that is $3,000 a year in interest. If you are paying that off over a 3 year period, that is $9,000 dollars that could have gone to investing. $9,000 in a portfolio that yields 4% in annual dividends and bond distributions would amount to $360.00 of passive income a year. In 10 years that would amount to an extra $3,600.00 in your pocket. Would you rather make money or lose it? The answer is obvious.

Paying Off Debt Frees Up Cash for Fun Stuff

Do you wish you could have more money to spend on yourself? I agree with Ramit Sethi when he says that we should allocate 20%-35% of our budget for guilt-free spending money. Unfortunately, many people cannot do this because they are so far in debt that they have no excessive income. You could put more money in savings or invest more, but most of us would like to live life a little bit on the way. After all, tomorrow is not guaranteed. If you have a loan where you have to pay $150.00 a month, that is $150.00 that you can’t invest or spend on yourself. Why give the money to someone else when you can make that $150.00 work for you?

Debt is Stressful

Do you like being stressed? Unless you are glutton for punishment, the answer is probably no. According to HomeServe USA, about half of Americans are living paycheck to paycheck. The New York Federal Reserve has said that much of this is due to debt. Who wants to live a life where the next unanticipated emergency would be a financial catastrophe? I cannot think of many situations that could be more stressful.

Having No Debt Gives You More Options

Do you like your job? While I advocate viewing your job as an asset that helps you to get to where you want to be, some jobs are very unpleasant. In fact, if your job makes you depressed, you could have better luck with getting another job if you have no debt. After all, if you have no debt, your income requirements are lower. This could give you the freedom to do something else that you like better even though it is not as lucrative. Making money is important, but our mental well being is more important.

If you lose your job, your emergency fund will last longer if you do not have to pay down debt. You might even be able to get by if you donate plasma and drive for Uber if you suddenly find yourself without a job. Your alternative options to being employed become broader when you don’t have to worry about keeping up with your credit card and loan payments.

Would you like to be able to pay cash for a car? Having no debt makes it easier to save up a large amount to buy a car. I’ve never had a car payment in my life, and I can tell you that I enjoy my vehicles more because of it. A shiny Mercedes Benz is not as fun when you are dragging around a $500.00 a month car payment. The first step of financial independence is to pay off debt as quickly as possible.

You Have a Moral Responsibility to Be Wise with What God has Given you

God requires us to manage our money wisely (1 Timothy 5:8, Proverbs 21:20, Proverbs 13:22, etc). We are to be able to manage our money so that we can provide with our family. We also should also invest in our children’s future. We should also be prepared to give to others. It is harder to do all of these things if we are in debt. Since it has been commanded of us, we must be good stewards of what God has given us.

PIMCO Income Fund Class D (PONDX) is a multi sector bond fund that is well diversified. Its current yield is 5.1% (distributions are paid to shareholders monthly) and it’s expense ratio is .79%. Though the cost of PONDX is a little high (I prefer a net expense ratio of .75% or less but will make exceptions for well-performing funds), it gives good cash flow with its high yield. This fund also has a 12b-1 fee of .25% (but this is already included in the net expense ratio) The most that the fund has lost in a 3 month period is 6.21%.

This fund has consistently outperformed its index, and it has also outperformed a majority of multisector bond funds. Out of all of the bond funds that I am invested in, this one is my favorite. With its beta of .19, it is not a risky fund to invest in. This fund is ideal for investing in both retirement accounts and taxable brokerage accounts due to its high yield. Its fund managers are well known among experts that follow the bond market. They are known for being able to “outsmart” the market, and PONDX’s consistently high performance seems to support that notion.

A majority of my investment portfolio is invested in this fund. Even in my taxable account, PONDX performs about as well after taxes as my best municipal bond fund (which is mostly tax exempt). I like this fund so much that I sold most of my shares of Charles Schwab’s bond index fund to buy PONDX. Its worst 3 month loss is only slightly more than bond index fund’s, but the performance is vastly superior. In the bond market, this fund comes out on top.